This chapter continues the analysis of a contestable market that was begun in Chapter 7 by developing a model that uses the theory of noncooperative games. The analysis of such a model will provide new insights into three separate but related areas: (1) The determination of conditions under which a contestable market equilibrium exists will be useful in assessing the proper role of regulation in natural monopoly and natural oligopoly markets. (2) The noncooperative game theoretic framework is one method by which the theory of sustainability, as described in Chapter 5, can be made more rigorous and complete. (3) The noncooperative model will provide an alternative approach to the question of market stability, which was analyzed in a cooperative game theoretic framework in Chapter 6.

Section 8.1 contains a description of the economic structure of both the model and the basic concept of a noncooperative equilibrium. The market that will be studied consists of two or more firms that produce a single output and have identical U-shaped average cost functions. Firms are assumed to compete by simultaneously choosing prices. Outputs and profits to each firm are then determined as a function of the vector of prices chosen by each firm. A price vector is an equilibrium price if no firm can increase its profit by a unilateral change in its own price. One simple model of equilibrium is considered in Section 8.1 and rejected as unrealistic.